Xilinx Dividend Capture With A Call Option Hedge

| About: Xilinx, Inc. (XLNX)

If you take a look you will find lots of companies worth owning offer quarterly (or more often) dividends to shareholders. This can be a wonderful source of investor revenue, and with each dividend payment received, investors are able to lower their risk in an investment. Many investors will buy a stock in part because of the dividend and the current yield. The one basic requirement to receive a dividend payout from a company is to be a shareholder on the day of record for the dividend.There are several dividend harvesting approaches.

Some are better than others. The trick is to minimize the amount of risk, and still have an edge. This is one of my favorite, and easiest to understand, methods of making gains with options and dividends. I get asked often how long I normally hold the position before closing out. On average I enter into a position with the idea I may hold it for a month with the current numbers here. Xilinx, Inc. (NASDAQ:XLNX) designs, develops, and markets programmable platforms in North America, the Asia Pacific, Europe, and Japan. The company is based in San Jose, California.

Xilinx, Inc.
Yield: 2.11%
Dividend Amount: $0.19
Ex-Dividend Date: February 06, 2012
Beta: 1.03

Here is a look at the fiscal year revenue:


I research the different call options and calculate the expected probabilities based on Beta, Bid, Offer, Volume traded the current day, open interest, and time value / implied volatility. The options offer some level of protection from possible down moves in the stock, and provide revenue to cover the times that the options do not fully cover down moves in the stock. Income is not needed from the option premiums, so a break even from option premiums received/stock losses ratio is a win.

I generally hold any given position for about three weeks. I use a few methods that produce consistent results and covered calls have proven to provide gains when work and effort are applied. With the gains made, I am able to stop out and take a loss with the few that do not work out as planned. When learning a new trading strategy it is better to use a simulated trading account first. It is easy to make mistakes when starting out on a new strategy, and mistakes cost a lot less with a simulated account.

After a level of confidence is built, then it may be time to move into a real money account. In this article we will go over an upcoming dividend with Xilinx that I may capture with a minimum amount of risk. The criteria that I use is that I must be able to sell a call option in either the front, or first back month that is in the money, and with enough premium that I will not mind getting exercised early (which happens often and can be a good thing if the trades are executed correctly).


In combination with my buying Xilinx stock and after checking company updates, offer to sell the February $35.00 strike call for $0.43 over the intrinsic value. The option may get exercised early for a gain. In almost all cases I will sell the call option first to ensure the stock option leg is complete first. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near $0.13, plus the dividend earned. It is important to sell the call option hedge at or near the asking price for at least the minimum amount over intrinsic value. I will not want to try putting on the hedge unless the sale of the option (hedge) will provide at least the full $0.43 over intrinsic value. If my shares get called away the day before they trade ex-dividend as a result of the option buyer wanting the dividend I will make about $0.43 Not all that great, but not bad for about a week of owning the stock. The most I can make is $0.62 if I hold the covered call through option expiration day and the stock gets called away.

My last step (completed before making a trade on the same day) is to check company announcements and news sources for possible events that may cause the stock price to move. This is especially important during earnings season. Learn more about stock options by clicking here.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XLNX over the next 72 hours.